New Mexico Internet Sales Tax

Learn about the Internet sales tax rules for New Mexico.

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If you are selling goods or products online and some of your customers are
located in New Mexico, you need to be aware of the state’s Internet sales tax
rules. As you read, keep in mind that collection of sales tax on Internet sales
has been a matter of ongoing debate both at the state and federal level.

The federal government is currently considering legislation that would
affect large Internet retailers and how online sales taxes are collected in all
states. The proposed federal law, called the Marketplace Fairness Act of
2013, would allow states to require sellers not physically located in their
state to collect taxes on online and catalog sales made to people in their
state. Sellers that make $1 million or less in annual sales and have no
physical presence in the state would be exempt from this requirement. States
would have to meet certain criteria to simplify their sales tax laws and
make sales tax collection easier before they could require sellers to collect
the tax.

Below is an article on the current rules on Internet sales tax in New Mexico. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.

A Note on New Mexico Tax Terminology

Instead of the more common term “sales tax,” New Mexico law uses the term “gross receipts tax.” In this article, “sales tax” and “gross receipts tax” are used interchangeably, even though gross receipts tax applies not just to sales but, in many cases, to services as well.

The General Rule: Physical Presence in the State

The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:

having a warehouse in the state

having a store in the state

having an office in the state, or

having a sales representative in the state.

For basic guidance on how physical presence is defined specifically under New Mexico law, refer to Section 7-9-10 of the New Mexico Statutes (NMS) and Section 3.2.13.8 of the New Mexico Administrative Code (NMAC). (Part 3.2 of the New Mexico Administrative Code is available online as a single document.) The statute and regulation provide guidance on the term “activity,” which might otherwise be referred to as “engaging in business in New Mexico.” The regulation, in particular, refers to engaging in the specified activities (such “maintaining or utilizing” a place of business) directly or by an agent.

The state’s sales tax law states that activity "does not include having a world wide website as a third-party provider on a computer physically located in New Mexico but owned by another nonaffiliated person, and ‘activity’ does not include using a nonaffiliated third-party call center to accept and process telephone or electronic orders of tangible personal property or licenses primarily from non-New Mexico buyers, which orders are forwarded to a location outside New Mexico for filling, or to provide services primarily to non-New Mexico customers.” See NMS 7-9-3.3.

As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.

A Note on “Nexus”

In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential “nexus” between a business and a state, including one type based on the Due Process Clause of the Constitution and another type based on the Commerce Clause of the Constitution. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which—as described by the Supreme Court—means physical presence.

In at least one of its online publications, the TRD discusses the requirement to charge gross receipts tax in terms of nexus rather than physical presence. However, the possible bases for gross receipts tax nexus as listed in the publication make it clear that, as in Quill, nexus is a matter of physical presence in the state.

Examples

Example 1: You are operating solely out of a warehouse in Philadelphia, Pennsylvania and make a sale to a customer in Santa Fe, New Mexico—a state where your business has no physical presence: You are not required to collect sales tax from the Santa Fe customer.

Example 2: You are operating solely out of an office in Roswell, New Mexico and make a sale to a customer in Las Cruces, New Mexico: You are required to collect sales tax from the Las Cruces customer.

Example 3: After several years of operating solely out of a warehouse in Philadelphia, Pennsylvania, you open a one-room satellite office just outside of Albuquerque, New Mexico—a state where previously you had no physical presence. A day later, you make a sale to a customer in Clovis, New Mexico: You are required to collect sales tax from the Clovis customer.

Non-Taxable and Deductible Items

New Mexico law considers tax on sales of items in terms of both “exemptions” and “deductions.” Under New Mexico law, some items sold via the Internet to New Mexico customers may be tax-exempt; in other cases, a taxed amount may be deductible. For a relatively brief and readable statement of the various exemptions and deductions, check the TRD FYI publication “GROSS RECEIPTS & COMPENSATING TAXES: AN OVERVIEW.” For a more detailed review and explanation of all exemptions and deductions, including relevant statutes and illustrative examples, consult the sections in Part 3.2 of the New Mexico Administrative Code covering NMS 7-9-12 through 7-9-114.

New Mexico also has an annual gross receipts tax holiday from the first Friday in August through to the following Sunday. The tax holiday covers such things as clothing and shoes costing less than $100 and various computers costing no more than $1,000. For additional information, check the TRD’s FYI publication on the gross receipts tax holiday.

The Customer’s Responsibility

In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax. Typically, this customer-paid tax is known as a “use tax;” however, in New Mexico, it is known as “compensating tax.” (On its general FAQ page for taxes, the TRD answers the question “Does New Mexico have a use tax in addition to compensating tax?” with the statement “No, New Mexico’s compensating tax is our form of ‘use tax,’ a term used in most other states.”)

The TRD’s Overview explains the compensating tax in more detail. Keeping in mind the Quill decision, note that one of the examples given in the Overview of where compensating tax is due is a mail-order purchase from an out-of-state company.

Final Words

The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time New Mexico has not enacted any law that would require out-of-state retailers to collect sales tax from New Mexico customers.